Wörgl Enters the Mainstream

The “Miracle of Wörgl,” Silvio Gesell, stamp scrip, Bernard Lietaer, Anthony Migchels; the memories flood my soul, like the time I ate street-side bar-b-que from a vendor in small town in Korea and felt it for the next four days…. And now, more than three years after my last writing on the topic…excuse me while I once again must offer tribute to the economic porcelain gods….

What is Wörgl and who are these characters that are causing such stomach pains in bionic?  Well, give me a moment to recover, and I will explain….

I have written several commentaries on this supposed Miracle of Wörgl.  The most concise was published at the Mises Institute site.  To make a long story short, I offer the opening paragraph from this post:

The "Miracle of Wörgl," refers to the story of currency demurrage and the impact it had on the economy of Wörgl, a small town in Austria. For a bill of such currency to retain its face value, the currency holder must pay a regular, periodic payment (a tax) for a stamp or other marking. Wörgl is regularly touted by advocates of demurrage as a successful implementation of such a currency, one designed to encourage velocity due to the incentive to spend it in order to avoid the periodic tax.

The theory behind the experiment of Wörgl comes from German economist Silvio Gesell (1862–1930).  He had many highly-respected fans at the time:

Free money may turn out to be the best regulator of the velocity of circulation of money, which is the most confusing element in the stabilization of the price level. Applied correctly it could in fact haul us out of the crisis in a few weeks ... I am a humble servant of the merchant Gesell.

— Prof. Dr. Irving Fisher

Quack.

Gesell's chief work is written in cool and scientific terms, although it is run through by a more passionate and charged devotion to social justice than many think fit for a scholar. I believe that the future will learn more from Gesell’s than from Marx’s spirit.

— John Maynard Keynes

Quack, quack.

Returning to the supposed miracle that occurred in this small Austrian town during the depression in the 1930s….  The town and surrounding region was suffering from significant unemployment.  The mayor convinced the locals to implement this scheme of currency demurrage – requiring a payment representing 1% of the face value of the currency every month in order for the currency to remain “good.”  The payment was evidenced via a stamp on the currency.

The “miracle” was a massive increase in projects financed by the government, thereby greatly increasing employment.  The ability to pay for these projects came from many sources, but the main one was that – in order to avoid paying the 1% fee as the end of the month drew near – the people used the currency to pay off their significant taxes owed in arrears.  They even paid taxes in advance.  This resulted in a major boon to the local government treasury.

The Austrian central bank shut down the experiment at about the same time all arrears had been paid.  In other words, the game was up one way or another.

So why is bionic regurgitating this bad meal, after more than three years?  OK, here goes: Want a Free Market? Abolish Cash.  So writes Narayana Kocherlakota.  Before I continue, who is Narayana Kocherlakota?

Narayana Rao Kocherlakota (born October 12, 1963) is an American economist and is the Lionel W. McKenzie Professor of Economics at the University of Rochester. Previously, he served as the 12th president of the Federal Reserve Bank of Minneapolis until December 31, 2015. Appointed in 2009, he joined the Federal Open Markets Committee in 2011. In 2012, he was named one of the top 100 Global Thinkers by Foreign Policy magazine.

Connected; well respected by the people who count.

He entered Princeton University at age 15 and graduated four years later with an A.B. in Mathematics in 1983. He earned a Ph.D. in economics from the University of Chicago in 1987.

A whiz kid; earned his Ph.D. at the most free-market economics school in the politically-acceptable world.

So what does Kocherlakota have to do with Gesell?  Let’s return to his article:

Larry Summers and the Fed: Advocating Monetary Policy for the People

Oh boy!  The fans of the peoples’ money must be jumping for joy these days!  Who knew that they would have advocates in such high places?

First of all, for those who complain that central banks create enough money to repay the principle, but not enough for the interest…well, if ZIRP for the last five years wasn’t enough to tickle your fancy, the future looks equally bright:

The Fed has tried to goose the economy a little more by promising to keep its key short-term interest rate near zero for years. Last year, it promised to keep ZIRP in place until unemployment fell below 6.5 percent, something it doesn't see happening until at least the middle of 2015. Lately it has started promising to keep rates low for a long time even after unemployment falls below 6.5 percent, a promise Fed Chairman Ben Bernanke repeated in a speech on Wednesday. (Emphasis added.)

All that is left is for the Fed to drop the money directly on main street – perhaps this is Yellen’s calling?

And what about those who advocate for a depreciating currency, a la Wörgl:

Some economists think interest rates should be much, much lower than zero: Maybe negative four percent, before adjusting for inflation.

Central bankers aren't talking about making people pay interest on their own savings. Not yet, anyway. The political outcry over that is easy to imagine. But they could find other, more creative ways to make it painful for you to hold onto cash. Giving money an expiration date or using electronic money in order to help control the flow of it are just a couple of the more creative ideas. (Emphasis added.)

One source of tremendous chuckles for me was regularly hearing the advocates of these schemes of monetary pixie dust accuse Austrians of being part of the system.  Well, I haven’t heard Bernanke or Summers call for an end to the central planning of money via central banks, have you?

But zero interest?  A demurrage currency?  It seems the peddlers of these schemes have friends in high places.

Anyone who advocates for any system other than a free-market in money, credit, currency and banking – regulated via contracts and the market – is an advocate of central planning.  As such, they play right into the hands, or are paid by the hands of those who would control us through the control of money.

Larry Summers and the Federal Reserve; oh, what strange bedfellows for the blowhards that have advocated for these schemes.

A Free Money Miracle?

I have an article published at Mises.org regarding the Miracle of Wörgl.  It is a summary of the previous work I have done on this topic.

The article can be found here.

Anthony Migchels Replies

Anthony Migchels was gracious enough to comment in two of the posts on this subject – here and here.  As I did with memehunter, I will reply via a new post, as the discussion merits this treatment.

I'm saying that when all backward payments (most certainly not just taxes) are settled, the money supply (of certificates) needed is smaller and thus certificates can be converted back.

This is why I claim the experiment is bound to end – even without the national bank intervention.  If the only use of the certificates is to convert them back to schillings, of what use are the certificates? 

If there are no or fewer exchanges to be financed, less or no of the certificates are needed.

Fewer exchanges mean fewer transactions mean no miracle.  The economy returns to the pace it had without certificates, because the economy is running without certificates. 

Your calculation is all wrong BM: 7000 in transactions per day is NOT 7000 in scrip! These transactions were financed with 5000 in circulation, meaning the certificates exchanged hands maybe 1,5 times a day.

Walk through step by step.  I am a municipal worker.  I get paid in scrip.  I can either buy something with the scrip, pay back taxes, or exchange it at a 2% charge for schillings.  In order for me to buy something with scrip, a vendor must be willing to accept scrip.  But at some point when all past due liabilities are settled (as you have already stated), the scrip will then be converted to schillings to avoid the demurrage – the only place the scrip has 100% value at month end is in the payment of taxes, and these back-taxes are by now fully paid.

So, as in your math the scrip that previously turned over more than once per day (5500 outstanding, 7000 in transactions per day), now will be disposed of by another means – THAT DAY.  The only other means is to turn the scrip in for exchange to schillings.  At the previous rate of circulation, this would happen 7000 times per day. 

All you can counter with is to say the rate of circulation will be lower (the holder of scrip will wait until the last day of the month before converting his scrip to schillings, in hope of having some better use and avoid the 2% charge), at which I will ask: where does that leave the sustainability of your miracle?

My logic holds, and the math holds.  The parish had 40,000 available to exchange.  This would have been depleted in 6 days.

Again: I'm talking about a means of exchange, you are talking about a store of value. A means of exchange needs to circulate to be effective.

As I mentioned in various comments, including my most lengthy post on this subject, I have no problem with various competing and complimentary schemes of money / credit / currency.  And if a supplier agrees to accept a form of payment, so be it.  I have no quarrel with Wörgl in this regard.

The point of my analysis (and I am oversimplifying) is that the miracle was attributable to greatly increased tax receipts prompted by the depreciating scrip, and that this increase in tax receipts was not sustainable – therefore the miracle was not sustainable. 

On this most critical point (my “key issue,” if you will), neither you nor memehunter nor summer offer a concrete rebuttal, although memehunter did rightly ask for clarification regarding the sustainability of the velocity after all back taxes were paid.

Added after initial post:

Again: I'm talking about a means of exchange, you are talking about a store of value.

I do not attribute the property of “store of value” to money / currency.  All value is subjective; therefor “value” cannot be “stored” in anything.

However, I maintain that money / currency received in exchange for my labor or other assets is my property.  To that property I have a right; however, I have no right to the “value” of that property.

A means of exchange is not wealth. It's not even really private property in the real sense of the word. It's more a public utility that we use together.

Whatever I receive in exchange for my work / product is my property.  To argue otherwise is to argue for some form of collectivism.  Collectivism, when forced, is an immoral proposition; and in any case, has never shown to be as effective a means to increase wealth as a system that respects private property.  As this is secondary to my main points, I am fine to leave this difference between us as is.

The only thing there is is Money Power and PTB opposition obscuring the issue and preventing from people finding out.

Again, as I have mentioned, I agree that the actions of the national bank at the time to stop the experiment were wrong, and I agree that decentralization and open competition in all facets of the economy (including currency) is better than the system we currently live under.  I also agree that money power and national governments do work hard to maintain centralization, and use all tools available to keep their monopoly position safe.

Summer’s Faith

In reply:

Summer

With his reply, Migchels only proved the point that the experiment was doomed to fail.  Can you figure out why, without asking him?

Don’t worry, I will give you the answer at the end of this post; but first let’s address a couple of other points he raised:

AM: Well, it was far from impressive, was it not? It's really strange to write two articles on Worgl and not notice that velocity was the key issue.

BM: I listed several specific reasons why the experiment was nothing more than a government forced boom and Gresham’s law at work – I wrote over 6000 words and listed almost 20 sources.  None of these specific criticisms have been addressed by you or (to my knowledge) Migchels.

As to the velocity issue, I addressed it in a subsequent post in reply to memehunter.  But I suspect you know this.  Further to the velocity issue, Migchels deep-sixes this benefit in the passage of his that you quote – being clear that the “key issue” of velocity is only temporary.  Can you figure out why, all on your own?  (Don’t worry, I will get to this.)

AM: But this is a very difficult concept to grasp for those infested with Austrianism, which is only concerned with the sacred rights of those holding money. This 'Entire society be damned, it's MY CASH and I CHOOSE' kind of mentality is really very hard to get rid of.

BM: it is easier to attach labels (especially when one has no understanding of the term) than deal in facts.  The disposal of private property isn’t an Austrian issue; it is an issue of justice.  However, with this sentence, Migchels makes clear the spirit behind his advocacy of demurrage – theft and envy.  This is the mentality that is “very hard to get rid of.”  It is the mentality behind the theory of government and state as practiced throughout the world today.

AM: The fact that 'the fear of demurrage' solved unemployment and the associated profound suffering is really irrelevant in the face of the fear of that great ogre of Austrianism: INFLATION.

BM: In my article I explained in detail why the experiment worked as it did and why it was bound to fail.  I did not blame it on inflation, or potential inflation.  But again, Migchels seems to be hung up on lables.  Inflation was not likely as long as the scrip was convertible…and Migchels states this later in his comments.  What if the scrip was not convertible?  Well, let’s wait to answer that.

AM: the total amount of trade financed by the certificates amounted to the equivalent of 2,5 million Schillings. While only about 5,500 worth of certificates were circulating on average. Meaning that the small demurrage of 12% made the certificates circulate at least a hundred times faster than the Schilling.

BM: Get it?  According to these numbers, 7,000 schillings of scrip transferred hands every day (2.5 MM / 360 days).  I will give you a hint to the big answer – how Migchels kills his own argument: the parish had 40,000 schillings of national currency at the bank as backing for the scrip.  Keep the figures 40,000 and 7,000 in mind.

AM: By the way: there was no threat of inflation in Worgl: the endgame would have been that all backward payments would have been settled and then the certificates would have been converted back to Schilling and out of circulation.

BM: There you have it.  Did you see it?  What did Migchels say would happen to the scrip when all the back taxes were paid?

Let’s walk slowly:  7,000 scrip schillings of transactions a day will no longer occur; instead this same 7,000 schillings will be returned to the bank for national currency according to Migchels (and he is correct, for as long as the conversion game can last).  But wait!  The bank only holds 40,000 national schillings available for the exchange.  In six days…POOF.  Not a very long game of “velocity.”  So much for “the key issue.”

What do you think it would do to his (and your) daunted velocity, once all the scrip was removed from circulation and replaced with the national currency? 

Migchels says “that velocity was the key issue” yet he shoots himself in the foot.  He knowingly or unknowingly predicts a bank run.

Alternatively at this point the parish could stop converting the scrip.  Now what?  Come on, summer.  What do you think that would do to the value of the scrip? 

OK, I will tell you.  Worthless scrip.  Inflation if not hyper-inflation (assuming any merchant would even take it).

Summer, you are stumbling in your faith, not wanting to recognize that your belief is based on faith.  You want to believe in miracles.  You are stumbling because you cannot handle the faith being questioned by fact.  That’s OK – I believe every word of the Bible, and I would feel the same way on that subject.  But at least I admit my belief in the Bible is based on faith, so I don’t get hung up about it.

Bring back some serious criticisms and questions.  Address the specific points in my article.